It was the greedy free market, supposedly, that created both the housing bubble and the housing bust and led, inevitably, to the great recession. Capitalism, according to most liberal pundits (and even Alan Greenspan in a bad mood), is an inherently risky and unstable system that requires government regulation to correct its flaws and moderate its excesses.

Let me dissent sharply from that conventional wisdom and argue that what talking heads are calling capitalism is actually crony capitalism and that it is crony capitalism that is responsible for most of our current economic difficulties.

A genuine capitalist economy assumes that each adult individual and business is free to buy and sell anything that they own and then keep the rewards (or suffer the losses) of enterprise. The only legitimate role for government (the political system) is to protect property rights, that is, to enforce contracts and prohibit theft and fraud.

So under capitalism, there would be no price controls on milk or mandates to purchase health insurance; BUT polluters who spill crude oil or corporate bandits like Bernie Madoff who commit blatant frauds would be prosecuted to the full extent of the law.

Crony capitalism, by contrast, assumes a far, far larger role for government in the economy. In this system, government employs various regulations, taxes, and subsidies to encourage or discourage specific economic activity that the political system considers desirable. For example, in crony capitalism, farm prices and outputs could be regulated; selected companies could get TARP money for commercial research projects; states could regulate liability and health insurance companies; and Freddy Mac and Fannie Mae could both exist to subsidize the real estate market.

And most importantly, in crony capitalism private firms that are considered too big to fail could be bailed out by government; and a central bank (the Federal Reserve) would exist to print money (unrelated to any gold reserve) and regulate the supply of credit in the economy.

It is hard to argue that the current economic malaise was in any way produced by anything resembling pure capitalism. But it is fairly easy to conclude that interventionism, i.e., private markets that were propped up with fraud and funny money was, in fact, the culprit.

First, the Federal Reserve kept interest rates too low for too long (20012006) and pumped excess money and credit into the economy. Second, numerous quasi-governmental agencies (Freddie and Fanny) encouraged excessive mortgage lending and home ownership out of all relationship to sound financial practices.

Third, much of the under-capitalized and over-leveraged banking industry collapsed when (federal) credit dried up and housing prices turned downward. And fourth, the federal government taxpayer and international lenders (mostly China) funded the trillion-dollar government stimulus plan and the bailout of inefficient business organizations (Chrysler, GM, AIG, etc.) that should have been allowed to go belly-up.

This is free market capitalism? Hardly.

Yet the political class, always absolving itself of all blame, would have you believe that capitalist greed caused the recession and that political regulators need more power. Not so. What we actually require are constraints on monetary growth, more competitive markets, balanced budgets and less output-restricting regulation. But first and foremost, before we spend and regulate further, we require an informed media and an enlightened public that can distinguish real capitalism from phony, crony capitalism.

From Dominick T. ArmentanoANTITRUST AND MONOPOLY: Anatomy of a Policy Failure
Does antitrust law restrain and restrict the competitive process, injuring the public it is supposed to protect? In this breakthrough study, Professor Armentano thoroughly researches the classic cases in antitrust law and demonstrates a surprising gap between the stated aims of antitrust law and what it actually accomplishes in the real world. Instead of protecting competition, Professor Armentano finds, antitrust law actually protects certain politically-favored competitors.